The Investor September 2019

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By Richard Cluver September 2019

No matter what your current income is nor what assets you own, the chances are that you have never felt truly wealthy nor have you ever enjoyed a comfortable surplus of income over monthly expenditure.

I have put this question to so many folk I know who demonstrably enjoy a comfortable lifestyle and have yet to meet anyone who considers themselves to be “Rich”. Yet the truth is that even if you are living on the dole in South Africa you are still better off than a third of the world’s population. Furthermore, if you are earning the minimum wage in South Africa you are massively wealthier that a significant number of the world’s population.

Arguably one of the most talked about topics in South Africa today is how poor we all feel as we watch the headlong downward dash of the Rand. The fact that both points are myths does little to comfort folk who have been forced to sit back and watch an increasing rate of emigration of our youth seeking greener pastures abroad.

“Of course we are trapped here by Rand weakness” is another hardy annual when yet another case of massive corruption is cited as another example of why “…the country is going to hell in a bucket…”

Let us start with the fact is that if you live in any of South Africa’s leafy suburbs and your mortgage is paid off you are almost certainly in the top ten percent of the nation in terms of your total wealth. Furthermore, if you were to work out the capital value of your pension, savings, property and other realisable assets accumulated over a lifetime, it is also very likely that you could be among the top one percent by net worth and that in turn makes you numbered within the most privileged on planet earth. The following South African statistics, courtesy of Credit Suisse might help to put things into global perspective:

Globally speaking, the middle class band of wealth are assets of between $10,000 (R144,000) and $100,000 (R1.44 million) – in South Africa, approximately 33.1% of the adult population falls into this category, representing about 11.72 million adults.

A net worth of just $93 170 U.S. (R1.39-million) is enough to make you richer than 90 percent of people around the world. And it takes a net worth of $770 000 (R11.35-million) to join the global 1 percent.

You need significantly less to be among the global 50 percent: If you have just $4,210 (R64 716) to your name, you’re still richer than half of the world’s residents. South Africans are, in other words, collectively relatively wealthy.

Now, consider the plight of the Rand. My graph below represents the behaviour of the Rand relative to the US dollar over the past 20 years during which time it has depreciated at an annual rate of just 3.5 percent a year as depicted by the red mean line.

The fact that it has tended to swing significantly about that line is why we so often feel that the ground is falling away beneath our feet. What the pessimists fail to recognise is that the Rand strengthened steadily between 2002 and 2005 and again between late 2008 and the end of 2010 and once more between early 2016 and February last year…and it is already strengthening again now.

Next let me offer the long-term performance graph of the grouping of JSE shares that are selected by the ShareFinder computer program as “Blue Chips.” These are companies that have delivered consistent dividend increases over the past decade. The red trend line superimposed upon the graph of the past 20 years indicates that this category of shares has increased in price every year at a compound annual average rate of 18.1 percent. Subtract the long term decline in value of the Rand of 3.5 percent a year and you can conclude that for those who have saved diligently over the years for an investment in an equal cross section of these shares, would have seen their wealth increase by 14.6 percent a year in US Dollar terms.

So, let us assume that 20 years ago you wanted to be wealthier than 90 percent of the population of planet earth. Had you saved just R1 000 a month starting 20 years ago and each month bought ShareFinder-selected Blue Chips, you would by now be worth R1.8 million which implies you would have joined the top ten percenters two years ago. Had you been able to save R8 000 a month, which is around the current average cost of a South African mortgage, you would now be among the world’s top one percent!

Now most of us enjoy an average working life at least twice that time and so, if you started with your first job and saved just R50 a month over a 40-year working life you would, long before you reached retirement age, have cracked the top ten percent level. And at R250 a month you would be able to comfortably retire as one of the top one percenters.

Inevitably one must conclude that people who feel increasingly poor in the current economic climate have probably been, at best, erratic savers. Attesting to that fact, our leading life insurance companies’ who assiduously study such things believe that only five to six percent of South Africans are able to retire in comfort. And a worldwide study by Schroders Global which questioned 22 000 wealth professionals across 30 countries has found that the average retiree drastically under-estimates the percentage of their retirement income that they will need to spend on basic living. On average retirees think they will need to spend around 34 percent where the reality is 60 percent.

Furthermore, according to the survey, South African retirees are receiving a much lower proportion of their final salary in retirement (59% on average) than people approaching retirement think they will need to live comfortably in their golden years (80% on average).

The chances are, if you are taking financial strain right now it is because you have failed to save an adequate portion of your income and convert it into a well-developed growth portfolio. And if you consider the inflation rate graph below which suggests that on average South Africa has suffered from an annual average inflation rate of approximately 5 percent, you are likely to face increasing strain.

What that 5 percent rate means is that if you recently retired at the age of 65 the buying power of your current income will have halved over the next 14 years. If, in other words, you do not now take drastic action to grow your savings, you will face a retirement of ever-increasing hardship.

Funds leave South Africa

By Sasha Planting of Business Maverick

Depression and gloom have settled over the suburbs and the conversation has turned to emigration for those who have the means and the inclination, and offshoring of assets for those who choose to stay. Business Maverick attempted to find out whether this flow of funds has turned into a flood.

Prescribed assets and foreign exchange controls were tools of the apartheid government and some South Africans will remember them well. What they will also remember is that they were the last-ditch tools of a government on the brink of collapse.

The mere suggestion that the government is considering attaching a portion of South Africa’s pension pool to fund state expenditure has inspired panic. To hear the rhetoric around the braai, every South African with means is considering ways of getting their money out of the country.

To what extent funds are flowing out of the country is relevant. South Africa runs a large current account deficit, largely because imports of goods and services exceed exports. This deficit is financed by inflows of capital investing in government bonds, but also by the South African savings industry which invests in the same government bonds.

South Africans, either directly or via institutions which invest on their behalf, have been investing a portion of their savings abroad since 1994 when foreign exchange control restrictions were first eased.

That said, it is difficult to find out whether South Africans are using their discretionary allowances more than usual, and if so, exactly how much money is flowing out of the country.

The South African Reserve Bank (SARB) publishes balance of payments data, which is the record of all economic transactions between the residents of the country and the rest of the world during a particular period of time. However, flows are recorded in more than 60 categories and the SARB is reluctant to divulge to what extent individual savings are leaving the country – in the context of the trillions captured in the balance of payment figures it is but a drop in the ocean.

There are different ways of investing offshore. The most common way sees individuals using their R1-million per annum discretionary allowance and investing offshore via foreign currency-denominated unit trusts.

These funds, more than 450 of them, are run by companies that are registered with SA’s financial authorities and are available on investment platforms, such as Allan Gray, Old Mutual, Investec Asset Management, Glacier (by Sanlam) and Momentum

Once invested in these funds, investors can choose whether to return the investment to South Africa, or pay it into an offshore bank account, should they exit the fund.

SA’s largest foreign currency denominated investment schemes

Assets under management in rands

Orbis Global Equity Fund

64,204,601,685

Investec Global Strategy Funds

48,813,256,620.35

Nedgroup Investment Funds

44 645 261 159.85

Stanlib Funds Ltd

38 259 682 063

Investec World Axis PCC Ltd

30 488 413 209.04

Prudential Global Funds

21 262 434 453

Contrarius ICAV

11 911 810 793.76

Momentum Mutual Fund ICC Ltd

11 893 031 481.86

Source: Association of Savings and Investment in SA

The flows in and out of these funds are tracked by the Association for Savings and Investment in South Africa.

The graph below shows flows from mid-2000 to mid-2019. It shows that since 2000 South Africans have been investing offshore in a fairly consistent fashion – on average about R6-billion in discretionary income is invested offshore every year. In 2016, R22-billion worth of savings flowed into offshore investments (from individuals and institutions); curiously, in 2018 a net R6.3-billion of offshore investments were converted back into rand, and the trend, according to Asisa is the same in 2019.

Net flows into foreign exchange denominated funds to June 30, 2019

https://www.dailymaverick.co.za/wp-content/uploads/BM-Sasha-Fundlfows.odt-graph-inset.jpg

 This seems to contradict the notion that South Africans are rushing to offshore their assets.

Sunette Mulder, a senior policy adviser at Asisa, notes that the information tracked by Asisa is submitted on a voluntary basis, and may not be conclusive. Of the figures above, 77% is invested by institutions, and the balance by individuals.

She adds, “There is little stopping people from taking their money out. R1-million a year is a lot of money for most people and they are not necessarily investing it in unit trusts; offshore property is one example of another option.”

Larger amounts require formal exchange control approval and tax clearance from SARS, but it is possible for individuals to move up to R10-million out of the country, per calendar year.

When one excludes institutions from the number, Asisa statistics show that between March and June 2019, South African individual investors invested just R700-million offshore (with the rand hovering between R14 and R14.90/$1), compared to the R2-billion they invested between January and March 2019 (when the rand moved between R13.12 and R14.52 /$1).

Again, this seems to contradict the lived experience. Tamryn Lamb, head of retail distribution at Allan Gray, has seen these cycles come and go, and adds that “investing offshore is prudent and everyone should have a plan to diversify their savings. “That said, we are sensing heightened anxiety from investors to place their money offshore which is not yet obviously apparent in the reportable flows data.”

There are a number of other factors at play, but she suggests that investors could be using their offshore allowance to invest directly with offshore institutions like UBS or Credit Suisse.

These fund flows will fall outside the Asisa stats but would be tracked by the SARB.

“Irrespective of what the data confirms, we would encourage investors to continue to exercise careful due diligence, and to evaluate any offshore opportunity within the context of their longer-term plan and goals, and not just as a short-term reaction to concerns about the local political or economic backdrop.”

Acknowledging that it is difficult to put a specific total on the funds flowing out of the country, Sangeeth Sewnath, deputy MD of Investec Asset Management, says one should look for clues to support or reject the theory that funds are flowing out of SA.

For instance, the banks are the conduit for the majority of forex trades in and out of the country. What do they say?

“The sense from the banks is that significant amounts went offshore in 2017, but this slowed in 2018 and remains stable in 2019.”

Emigration is a trend that is hard to miss. An annual FNB survey of estate agents on the reasons for house sales, shows that 7% of sales were due to emigration in 2010, 3% in 2014 and 8% in 2018. In the first six months of 2019 that number has jumped to 13.5%.

This trend was corroborated by Roy Douglas, CEO of ADvTECH, who noted that about 930 children left Crawford schools in 2018 for reasons of emigration, and another 500 so far this year.

SA’s number of assessed taxpayers has fallen considerably over the last 4-5 years, moving from six million taxpayers in 2013 to 4.7 million in 2017. Again, the number is not definitive, but it’s an indicator.

“What these three things tell us, at a macro-level, is that the trend of people and funds moving out of the country is picking up,” says Sewnath. The reason this may not reflect at an Asisa level is that people are looking for safety – not just from rand/dollar volatility, but equity volatility.

“In the last year we have seen exodus out of general equity and into fixed income and money market funds. People who are nervous locally are putting their money directly into cash offshore or into local money market accounts.”

Farrell Mitchell, director of currency and wealth manager Capta Wealth, says he is seeing a huge shift towards formal emigration among clients. Part of this is being driven by the change in tax legislation whereby South African tax residents are no longer exempted from paying tax on income from foreign employment.

“This is shifting the behaviour of South Africans who have never formally emigrated. But we are also seeing more middle-class families emigrating.” Ian Edwards, a partner with financial planning company Austen Morris Associates, adds that the debate about taking money offshore should not be a political or emotional decision – it’s just prudent financial planning.

“We cannot forecast what will happen; we are agnostic, but think it is wise to have a substantial portion of your savings in hard currency. That said, we are seeing an increasing number of enquiries from people wanting to use their offshore allowances,” he says.

“There is a lag in the reported numbers – whether from SARS, the banks, Asisa or the SARB. Thus, it’s possible we are not seeing these trends in the numbers yet,” says Sewnath. 

China and Intellectual Property

By John Mauldin

I’m going to start with a story that might fit better in the middle of the letter, but I suspect some readers will not get there. They will read my rather strong free trade biases and feel that I don’t recognise the problem China represents. Nothing could be further from the truth. While I am not happy with the way that Trump is conducting the “trade war,” I’m glad he is doing something about it.

There is a drug produced in China that works well on strokes and numerous other less devastating medical issues. It is derived from pig pancreases or human urine. It isn’t approved in the US due to justifiable regulatory issues, but it is used in Europe as well as China. It is quite expensive, both to produce and buy.

A small biotechnological firm in the US has the technology to synthesise this drug without using pancreases or urine. This would be safer and lower-cost. The Chinese company agreed to pay the US company $4.5 million upon the meeting of certain guidelines and then to purchase the drug from the company at a fraction of its Chinese production cost. For the US company, having the main distributor buy their drug without having to set up the distribution process was a good deal.

The US company spent a great deal of money and met their guidelines, providing the Chinese company with everything required under the contract. The Chinese company then said, basically, “We need to see the actual process and cell lines in order to verify the process.”

That means, in essence, “Give us your intellectual property.” With that knowledge, the Chinese company would no longer have needed the US company. When the US company had to tell shareholders that the deal fell through because they (correctly) told the Chinese company to go pound sand, their stock value plummeted. The Chinese company knew that would happen and had bet the Americans would fold. In this case, they didn’t.

This happens many times every year with Chinese companies on a hundred different fronts. Standard practice. It is why the US and other countries push back against the theft of intellectual property by Chinese companies.

Let me go just a little bit further. This is not just some widget or a better way to make a phone. This is a drug that, if it were introduced into the United States and the developed world, would allow far quicker treatment for stroke victims and save thousands if not tens of thousands of lives every year.

This is just a small part of the cost of Chinese intellectual property theft.

Binary Thinking

I have long said that protectionism is the single biggest threat to global prosperity. As we were approaching the 2001 recession, there were calls for trade protectionism. I wrote at the time that the single most destructive economic force that can be unleashed on the United States would be serious trade protectionism.

Unfortunately, I have to keep saying that because politicians keep trying it. What Trump is doing right now is not new. I wrote this back in 2007.

That is the growing mood in Congress for passing trade protection legislation that could start a series of retaliatory actions around the world that could result in a trade war, a la Smoot-Hawley in the 1930s.

Stephen Roach, chief economist at Morgan Stanley, writes a rather chilling description of his recent testimony before the Senate Finance Committee. He noted that as he entered the room, he looked up and saw a picture of Senator Reed Smoot on the walls, as Smoot was a former chair of the committee and the co-sponsor of the Smoot-Hawley Tariff Act of 1930, largely responsible for the Great Depression.

At the hearing, it was clear that a bi-partisan effort is getting ready to pass legislation that would punish China for the large trade deficit we have with that nation.

As I recall, it was Democratic Sen. Chuck Schumer and Republican Sen. Lindsey Graham who led the way worrying about trade deficits, proving mainly that neither of them knew anything about trade deficits. As we will see in a bit, trade deficits are not the issue. Fortunately, that effort fizzled, though I suspect it helped set up the 2008 fireworks.

Politicians of all parties love free trade in theory. Its benefits are clear, but they are also unevenly distributed. Which I admit is a problem.

As long as we have sovereign national governments, goods will face obstacles and delays getting across borders. We can’t have truly “free trade” unless we eliminate borders, which of course creates other problems. (Think of the US as a free trade zone. Would we be nearly as prosperous if we had to negotiate every little trade deal between various states?)

Countries that trade with each other need fair and reasonable rules governing it, and both sides must enforce the rules. Obviously, this is complicated in a modern economy. That’s one reason trade agreements take so long to negotiate.

And of course, there will always be squabbles and disputes. But generally open trade is possible, as we see in blocs like the European Union and NAFTA. It works because all sides are committed to making it work.

Problems occur when a country flouts the rules or enforces them selectively, as China does. I’ve often talked about China’s rapid entry into the advanced world’s economy. In less than a few generations it went from subsistence farming to modern industry. This happened because the US and others agreed to let their domestic businesses trade with China on favourable terms.

China was supposed to reciprocate with similar terms of its own. It pretended to, but hasn’t been thorough or consistent. This is most evident in intellectual property. The Chinese government routinely extracts (or steals) trade secrets from foreign businesses that wish to operate in China. Software code, drug formulas, and other information then finds its way to Chinese companies that shamelessly copy it.

Again, this is nothing new. The same thing happened years ago when Chinese merchants pirated all manner of Western consumer goods. More recently they’ve done the same for intangible technology and sent it into overdrive. And the Chinese government does nothing to stop it.

Talks to resolve these and other problems have been fruitless. Beijing agrees to changes then fails to implement them, and gets away with it because the US and other Western democracies have these inconvenient things called “elections.” China’s rulers know they can just wait out the clock until we get a new leader with different priorities.

The Trade Deficit Is Not a Scorecard

Give Trump credit for at least recognising the problem and trying to do something about it. Unfortunately, he has some odd ideas about what “winning” looks like. Furthermore, he gets bad advice from so-called “economists” like Peter Navarro.

I deleted half this letter which was basically an exposé on Peter Navarro who I think is the most dangerous man in the Trump administration, if not the country. I know he has a Harvard PhD, but I think William Buckley had it largely right when he said better to be ruled by 2,000 random names from the phone book than by professors from Harvard.

We see this in the president’s trade deficit obsession. He seems to believe it is some kind of scorecard. If the US buys more from China than China buys from the US, the US is losing. That is not what it means at all. Both sides get what they want. China (or other exporters) gets cash, we get useful goods at fair prices (or we would stop buying them).

Better yet, since we own the reserve currency, we get to pay for these goods in dollars, which then return here as the Chinese or foreign recipients invest in US assets, namely our Treasury debt. That’s good for Americans. In fact, it’s critical. Our interest rates would be sharply higher, and our currency much lower, if not for the trade deficit, because US savers would have to cover the entire government debt. We don’t save nearly enough to do that.

And that is a very critical point. If other nations don’t want your currency, you can’t run trade deficits without severe economic problems. Valéry Giscard d’Estaing was right: The US has an exorbitant privilege as owner of the world’s reserve currency.

In fact, if you have the reserve currency, it is your obligation to run deficits so that the world has enough currency to conduct trade. No country south of the Rio Grande has that privilege. The Europeans kind of, sort of do. And the Japanese. The Chinese are working diligently to make the yuan a reserve currency, though they are not there yet.

If the US fails to run a real trade deficit, we will cease to have the reserve currency. It is that simple.

Bilateral Trade Balances—Whack-A-Mole?

Eliminating the trade deficit is not as easy as it may sound. Paul Kasriel sent out a note this week that I found compelling. Let me quote:

President Trump has imposed higher tariffs on US imports from Mainland China, in part, to narrow the bilateral trade deficit that the US runs with China. The president’s tariff policy appears to be working. As shown in Chart 1, the 12-month cumulative US trade deficit in goods with Mainland China (the blue bars) is narrowing. For example, after a reaching a record goods deficit of $419.5 billion in the 12 months ended December 2018, the US goods deficit with Mainland China narrowed to $400.7 billion in the 12 months ended June 2019.

https://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/IMAGES_1_20190823_TFTF.png
 Source: The Econtrarian

So far, so good for President Trump’s desire to see the US bilateral trade deficit with China narrow. But, I think it is fair to say that the president believes that it is in the best interest of the US to not only reduce our bilateral trade deficit with China but our trade deficit with the rest of the world as well. And here, things are not moving in President Trump’s desired direction. Also shown in Chart 1 is the 12-month cumulative US trade deficit in goods with the world (the red line). Although the US bilateral goods trade deficit with China has been narrowing in recent months, the US goods trade deficit with the world widened to a record $886.0 billion in the 12 months ended June 2019. This seems like a game of Whack-A-Mole. President Trump hikes tariffs on imports from one country in order to reduce the bilateral trade deficit with that country, and our trade deficits with other countries widen.

Again, the trade deficit is not a problem. But even if you assume it is a problem, tariffs won’t solve it so long as the government continues to run huge and growing deficits. No one in either party has any intent of even moving toward a balanced budget. Therefore, the trade deficit is going to grow—with other countries even if not China.

The US is using the wrong weapon to solve the wrong problem and harming our own economy in the process. What would work better? I believe that Trump’s choice (which candidate Clinton said she would do as well) to cancel US participation in the Trans-Pacific Partnership was a mistake. That agreement would have set up a giant free-trade zone as a counter to China, and I think at a minimum would have forced Beijing to negotiate more sincerely. TPP had more than a few problems, but they could have been fixed. But best case, it would’ve made it much easier for companies in the US to skip over China for their supply chains.

As it stands, the other TPP nations went forward without the US and are now trading with each other on more favourable terms. Thanks to TPP, Japan increasingly imports food products from Canada instead of the US.

Navarro appears not to care, and Trump appears to agree with him. And to be fair, Trump had protectionist leanings long before he met Navarro. Some of this might be happening anyway. But the combination of Trump and Navarro is proving economically catastrophic.

There has been a series of articles for the last five months pointing out that the Trump tax cuts averaged around $900 per taxpayer. Tariffs have already eaten about $800 of that tax break, essentially nullifying the benefits of the tax cuts. JP Morgan said it again this week.

We have spent two years digging a hole to China. Will we spend at least that many years refilling it? Trade wars are not easy to win.

Should we be dealing aggressively with China on its theft of intellectual property, its lack of a fair playing field, its mercantilist policies and government subsidies of companies? Absolutely. And you can insert a few expletives deleted after that absolutely.

We can start dealing one-on-one with companies that are clearly violating intellectual property and other WTO rules. Simply ban them from doing business in the US, or take away their banking privileges. WTO should classify China as a developed market in WTO, not an emerging one. Just look at pictures of Beijing and Shanghai and dozens of other cities to recognise China has emerged.

Tariffs are hurting US consumers. China is not paying those tariffs, we are, and any economist worth their salt (other than Navarro) knows it. Get tough with China? Damn Skippy. But don’t make Americans pay for it. If you’re going to fight a trade war then don’t point the gun at yourself.

When freedom leads to improved economic outcomes

By Brian Kantor

It has proved very possible for average incomes and spending power to improve consistently over long periods of time. In the West economic progress has now been sustained for centuries.

Over the past 70 years the improvement in global per capita incomes has been especially impressive as the process of economic growth has been extended more widely. Global incomes per head in inflation adjusted terms have increased on average by about four times since 1950.

And as the world population increased by over 5 billion to over 7 billion over this period, those subject to absolute poverty have declined to about 1 billion, fewer poor than in 1950. Absolute poverty may be defined as having less than 3.5 current US dollars to spend each day on the essentials to sustain life.

A global economic success story – many more humans- many fewer impoverished

Parson Malthus would be very impressed. He argued late in the 18th century that the population growth that came with higher incomes would in turn depress wages and incomes – so making economic progress but a very temporary form of relief for mankind. Economic history has proved to be not at all so dismal. And can help explain how the human condition has been so uplifted.

Not all countries or regions have performed as well as others. Nor inevitably have all shared equally in the progress. This uneven pace of development helps the explanation of it. David Landes identified and summarised the essential, ideal, conditions for economic growth as follows:

1. Secure rights of private property, the better to encourage saving and investment. (We might add also to encourage enterprise and innovation and devotion to duty, that is appropriately rewarded)

2. Secure rights of personal liberty – secure them against the abuses of tyranny and private disorder (crime and corruption)

3. Enforce rights of contract, explicit and implicit.

4. Provide stable government, not necessarily democratic, but itself governed by publicly know rules (a government of rules rather than men)

5. Provide responsive government, one that will hear complaint and make redress

6. Provide honest government, such that economic actors are not moved to seek advantage and privilege inside or outside the marketplace. In economic jargon, there should be no rents to favour and position.

7. Provide moderate, efficient, ungreedy government. The effect should be to hold taxes down, reduce the government’s claim on the social surplus, and avoid privilege.

We might further summarise these essential conditions for economic development as that of cultivating economic and political freedom as best as possible. To allow individuals to pursue their interest in higher incomes with as little interference and obstruction from others. That is freedom to buy and sell, to employ or be employed to hire or rent as they see fit. And to protect these freedoms and their consequences in the form of savings and investment from arbitrary expropriation by other individuals or the government.

It is the sum of the efforts made by millions and billions of economic actors to do as best they can for themselves and their dependents that leads to higher levels of national production and incomes. Governments – exercising the collective will -can facilitate this process or inhibit it more or less damagingly. Or in other words politics, that sets the rules, habits and culture identified by Landes (-and many others notably Douglas North2 who help found the modern school of institutional economics) can help accelerate economic growth or slow it down.

Why then do countries fail to adopt the right mix of rules and regulations for the sake of economic progress? Even as other countries – even their neighbours – do so much better at compounding, ever higher, the incomes and living standards of their citizens, including the standard of living of the poorest 20% of their populations. Those least economically advantaged by dint of their own economic outcomes, can benefit materially from income and benefits redistributed their way out of the incomes of the better off.

Provided the economy is prosperous enough and the tax base is consequentially wide and deep enough to allow for significant transfers that will not much inhibit the process of growth itself. The inevitable tradeoff between growth and redistribution calls for careful judgement. For growth and redistribution and hopefully not redistribution at the expense of growth.

American economists Acemoglu and Robinson have more recently examined a great variety of cases, that identify the failures to adopt the right economic stuff. As they make very clear the stumbling block to economic advances are the powerful interests in the economic and political status quo.

These with a valuable stake in the system, as it is, will always be threatened by the competition for their customers or suppliers that comes with economic and political freedom. For example those with inherited or captured valuable land and mineral rights, or guilds of professionals protected by high qualification barriers to entry, or merchants with government chartered monopolies of valuable trades, or powerful trades unions with strong bargaining powers, will all wish to protect the economic advantages they may currently enjoy- including perhaps constraints of imported or foreign competition.

Those with government-favoured ethnic or religiously based credentials to do business or find employment on preferred terms, will resist the competition that might reduce their incomes and opportunities that comes with open markets. The government officials responsible for administering the rules and regulation that govern economic activity will also have an economic interest; well paid jobs perhaps. They are not natural reformers of a system even when acting fairly and honestly.

Economic freedom is highly supportive of a general interest in a stronger economy. But the general interest in a strong economy and rising per capita incomes does not necessarily prevail. Special interests may well prevent it happening. Economic and Political Freedom is being measured.

Freedom House has long compared what may be described as political freedom or democracy across countries. The Fraser Institute in Vancouver Canada has pioneered the similarly comparative measurement of economic freedom.

The ranking order of the countries scored for economic freedom by the Institute and for freedom measured by Freedom House is highly correlated with an R squared of 0.97 and not co-incidentally so. (see below)

In the chart and tables below we show the respective scores (out of a possible perfect 100 for economic and political freedom and their differences) It may be seen that a relatively high score for economic freedom may be enjoyed without much political freedom. As in the cases of China, Russia and Vietnam. Singapore is the most free economy (88.4 points) according to the Fraser calculations but only is credited with 51 points for political freedom. New Zealand ranks second for economic freedom with a score of 84.9 and does very well on the Freedom House tally.

Finland, Norway and Sweden among a few other countries register a maximum of 100 points for political freedom. Their scores for economic freedom are in the mid-seventies. The US achieves a score of 86 for political freedom and an impressive – but not world beating – score of 80.3 for economic freedom.

Political freedom without a high degree of accompanying economic freedom appears very unlikely on the evidence. When given the opportunity the people have voted for a high degree of economic freedom. Experiments with top-down economic planning (in the Soviet Union and China and Cuba for example) reveals that It takes the repression of democratic freedoms to deny economic freedom.

The difference between the Fraser score for economic freedom and the Freedom House Score (A score of above zero indicates relatively more economic than political freedom and viceversa.) The above the line differences are greater than those below the line.

South Africa – unsurprisingly – scores very poorly for economic freedom. The score of 64.5 gives it a low rank of 110 out of 160 countries. This economic freedom score has declined in recent years. The score for political freedom of 79 places SA in the second quartile of free countries. The countries judged as most free economically are mostly those with high average per capita incomes and with the smallest percentages of their populations suffering absolute poverty.

The higher income countries register well on the economic freedom scale despite the tendency for the governments of the higher income countries to collect not only more taxes but for their taxes to command a higher proportion of their (higher) GDP’s.

Clearly the more tax paid out of incomes the less freedom left over for individual taxpayers to exercise their own economic freedoms. There may well be an important element of redistribution from the better to the less well off in society in the mix of taxes and government spending. This detracts from the freedom to consume by some members of the society while adding to the freedom of others.

Tax revenues in the modern state are widely used to provide private benefits. And not only to provide what may be described as pure public goods, for example spending on defence, law and order and the infrastructure that provide similar benefits to all citizens independently of their incomes. The high-income countries are typically not shy to regulate economic activity. However they appear to regulate better than the bulk of lower income countries, according to the Fraser metrics. Their regulations are judged as more transparent and predictable and less vulnerable to corruption. It would appear however that the share of GDP taken by the governments of the most advanced seven economies (the G7) in taxes may well have stabilised.

The global financial crisis and the accompanying decline in GDP saw the government spending ratio rise and the ratio of taxes to GDP decline. But more recently the ratios have stabilised at their pre-crisis rates. Perhaps this indicates the influence of mobile taxpayers- corporations and wealthy individuals – who can choose to some degree their domiciles. Competition for mobile tax-payers may well help restrain tax rates- in ways that promote economic growth and serve to increase the amount of tax collected. Germany is a very demanding tax collector while the US combining all levels of government taxes comparatively lightly as may be seen in the further figure.

The average GDP per capita for the G7 has increased by about 38% since 1990- equivalent to an average compound rate of growth of 1.88% p.a. fast enough to almost double per capita output every generation of 30 years. Presumably such a fast pace of growth cannot be sustained indefinitely. Higher per capita incomes will lead to increased consumption of leisure- and fewer working hours on average.

The equivalent South African trends have been moving in the wrong direction for freedom and economic growth. The ratio of government spending and tax revenues to GDP have been increasing while per capita GDP has stagnated since 2010. The inability of South Africa to restrain the upward march of government spending given the weakness of the economy has led to higher tax rates – and a larger share of taxes in GDP.

The higher tax rates intended to close the gap between government spending and revenues have in turn discouraged economic activity and depressed tax collections. The answer for South Africa’s failure to improve per capita incomes growth and a potential government debt trap that accompanies persistently weak GDP growth is greater economic freedom to stimulate growth.

Economic history makes this advice very obviously valuable. But as in all cases of frustrated economic development there is a powerful interest in the SA status quo. The bloated SA government and its state-owned enterprises provide a very good and much improved standard of living for those who work for and supply the state on highly favoured terms. A freer more competitive economy would clearly threaten their well-being and will be resisted accordingly.

For South Africa as with all economies, the choices a society makes – choosing less or more economic freedom will determine the economics and economic fate of its most vulnerable citizens. We can only hope that South Africa given the bleak alternative makes more of the right choices.


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